China cheap housing drive no cure-all for economy

At work on their computers in their quilted pajamas and fuzzy slippers, Han Zhixiang and his wife look the picture of newlywed contentment in the "affordable housing" apartment they sometimes share with her parents.

Their home in "Neighbor Gardens" is one of millions of subsidized apartments already built or under construction in China. The ambitious program is meant to provide decent accommodation for families priced out of the commercial real estate market _ and to help keep economic growth humming as China is buffeted by weaker demand for its exports.

On paper, building affordable housing seems like a tidy way to provide inexpensive homes at prices low-income families can manage, while keeping property developers and other industries busy by generating demand for home furnishings, autos and building materials such as steel, copper and cement.

But whether the plan to provide housing for a fifth of the country's urban families will achieve its aims is in doubt. Problems with financing, quality and corruption are plaguing the project. And for many, the prices are not low enough to offset disadvantages such as the out-of-the-way locations.

The gap between the rhetoric and reality of affordable housing is emblematic of China's lack of progress in making consumers a bigger part of its economy and shifting away from heavy reliance on low cost exporting. That project has taken on a renewed urgency as rising costs within China make it less attractive as a manufacturing base for global corporations and economic woes in Europe and the U.S. take a toll on exports. Bejing earlier this year lowered its annual growth target to 7.5 percent, signaling that China's decades of explosive double-digit growth is drawing to a close.

"Just to pin hopes on the social housing segment of that real estate sector to improve economic activity is a bit of a stretch of the imagination," says Nicholas Zhu, an economist with ANZ in Shanghai. He estimates that the program will provide only marginal support for industries such as steel, cement and construction.

Han and his wife Ma Jie seem happy with the 92-square-meter (990-sq.-foot), apartment in the eastern outskirts of Hangzhou. But not so happy they want to live there full time.

Outfitted with a modern kitchen and decorative glass shower stall, recessed lighting and glittering lavender hanging lamps, its windows plastered with "double happiness" characters designating their newlywed status, the apartment sits amid dozens of construction projects and not much else.

Like many other such projects, it's at least 45 minutes by car from downtown, and longer by bus. Subway lines are planned but far from completion.

"It's a bit far," says Ma. Even though they work from home, selling products on Taobao, China's version of eBay, the couple plans to continue sharing another apartment in the city with his parents, where schooling will be easier for the baby on the way.

Soaring prices have pushed home ownership out of reach for many Chinese, especially for young families like Han's.

Investment in housing and other construction is a major driver of China's growth. But 14 years into China's commercial housing reforms, the market is overcrowded with expensive, often vacant, apartments and villas. Meanwhile, demolition of older housing has worsened shortages of cheap rentals, adding to frustrations over urban living costs.

Those measures prompted developers to offer big discounts on some projects, stirring up protests last fall by home buyers upset to see latecomers get better deals. All the same, the policies will remain as long as prices are "far from reasonable levels," Premier Wen Jiabao recently declared.

In lieu of sweeping reforms of the financial sector and economy needed to address growing inequality and make property speculation less attractive, top leaders are committed to the program, pledging to make low-income housing available to about a fifth of urban households.

But already government targets are dropping as developers and local governments balk at expanding already hefty piles of debt to pay for projects bound to low, if any, returns, that will occupy land that might otherwise be sold to developers or industries at top dollar.

Most affordable housing projects appear to be handled by local government contractors: smaller real estate developers are succumbing to the downturn or selling out to bigger players, while the biggest generally are shifting to nonresidential commercial real estate, or just biding their time.

Corruption and problems with construction quality have further damaged the program's credibility.

In eastern China's Anhui province, some affordable housing units had huge holes in the walls and floors. In other places, local officials have taken the housing for themselves. Luxury sedans parked outside gave them away.

To hit their target last year of 10 million affordable housing starts, authorities included various other housing schemes, such as factory dormitories, resettlement for urban renewal and even some luxury housing, analysts say.

"If you define it wide enough, you can hit your target," said Stephen Green, an economist for Standard Chartered Bank, based in Hong Kong.

About a third of last year's starts amounted to only a hole in the ground, according to the Ministry of Housing and Urban and Rural Development. It cut the benchmark for housing starts to 7 million in 2012, while the target for completions rose to 5 million, up from 4.32 million last year.

An analysis by Nicholas Borst of the Peterson Institute for International Economics found that financing for affordable housing would have to nearly double to compensate for lost growth if property lending remains level with last year.

The central government says it is allocating 212 billion yuan ($33.6 billion) for the program, which coupled with bank lending and debt-financed local government outlays may keep funding on par with 2011. It is unlikely to double.

With most projects located in remote suburbs with inconvenient transport links and few or no schools, hospitals and other social services, many potential buyers and renters seem unimpressed anyway.

Potential applicants complain that the rents, at only a 10 percent to 20 percent discount, are too high. Others object to conditions requiring buyers to wait five years before they can sell, and to then hand up to 70 percent of the proceeds back to the government.

Retired worker Zhang Biqi lives with her husband, mother and 30-year-old son in a 13 square-meter (140 sq. foot) downtown Shanghai apartment that is over 60 years old.

"Housing is so expensive we don't dare to even look at the downtown projects being shown," Zhang said while wandering through a real estate exhibition. But after visiting various affordable housing compounds, she said she's not even considering applying.

"It's just not convenient for my son's work. And considering the locations, the prices are not all that low," she said.